A discussion about "Stops"
At the request of one of our subscription members we wrote this article on stop orders (also know as "stop loss orders) in order to make your exits closer to VHF’s. Our client Mike, asked, "what’s a stop order?" and said it would be helpful if we listed our exact exit points (stop levels) instead of telling members to "set your stops" or "set your stops tight". As I explained to Mike, VHF runs a book. This means we actually run money for wealthy individuals and no professional manager will tell the street their buy or sell points, knowing the competition will use this information to bury us alive! The advantage is similar to front running only legal. For example if you know I’m buying a couple of million shares of MSFT (Microsoft Corporation) at 57.75. Wouldn’t you be buying MSFT at 58? Why not buy at 58 you have unlimited up side while you are protected on the downside ( 58-57.75 = .25) as long as you know that the buy order is still there. I hope now you understand why we do not list specific stop prices, we do it to protect all of us since your stops would be identical with VHF’s. By keeping the competition guessing they cannot quantify their risk.
What is a “Stop Order”, for purpose of execution just shadow us and let your broker do the rest. Educationally speaking stop orders are used primarily to control losses. Here is a simple example we buy 100 shares of MSFT at the above price of $58.00. So now we are long 100 shares of MSFT at 58. Since we always have an exit strategy, as soon as we get confirmation we enter in an order to “sell 100 shares of MSFT @ 57.75stop” some brokers will ask if this is a stop-loss it’s the same thing. Don’t get confused by the fact a sell stop is placed below the market (current market price) while a buy stop is placed above the market. It’s extremely important your broker knows this is a stop order! If not in this example you end up selling immediately and your broker is proud to give you a fill better than you stop in this case 57.75. A sell-stop at 57.75 does not guarantee you will be filled at 57.75. It does guarantee you will be filled if MSFT trades at or below 57.75 but it does not guarantee price in any case. Stop orders become market orders once the stock starts trading 57.75, therefore, the price may vary like any market order. Our stops are part of an exit strategy, price is secondary if the original plan is failing, for this reason we do not use stop-limit orders.
We enter all our stop orders on a “day only” basis rather than a “GTC” (good until cancelled) basis due to lack of liquidity in the pre and after market trading. I could be wrong but I believe the average retail investor has no choice and must enter stops as “day only” when placing stops. Anyway unless you say GTC it’s a day order.
As we explained to Mike earlier we have to keep the competition guessing on where we are placing stops. The most accurate method is to continue to check our web-site in the members “trades and ideas” section this will give you the exact price of VHF’s execution. But as a rule of thumb if we say set your stop tight, hint, less-than two points. On stocks $2.00 or less there is no stop but the trade will be rated very risky or a “day trade”. Hint trades like this should be a very small part of your holdings assume there is real possibility you will lose your investment, think why is this a $2 dollar stock? On stocks trading between $2 to $15 dollars, set your stops at 30% to 50% of the purchase price. Remember this is disaster protection and stops will seldom be the actual exit price. Hint lower priced stocks will carry the 50% stop. All stocks $15 and higher will have stops set between 5% to 25%, again the lower priced stocks carrying the 25% stop level.
I hope this helps you in defining stops placements. Again the best way is check our web-site to confirm our exact exit point. VHF makes money by limiting our losses and letting our profits run or by stacking. And though on low priced high risk trades we a willing to lose 50%, our profit goal on these types of trades exceed 100% annualized return. You as an investor must realize when we talk of low priced stocks $2.00; high rates of return 100% plus, and possible 50% losses. You should be thinking danger and either have nothing to do with this particular trade or have a very small position. Know the risks before you trade.
The United States Treasury defines VHF’s definition of risk. An investment vehicle that yields greater than the equivalent Treasury security with the same duration has risk. For example if you’re a long-term investor the current 10year US Treasury Note is the risk-free rate. Therefore, any investment that yields a return greater than the 10 year Treasury note has risk. The Current 10 Treasury Note yields 4.5%; therefore, any return greater than 4.5% with a 10-year duration has risk. The greater the return the greater the risk, as risk is measured as a spread over the risk-free rate. This is true for any investment vehicle stocks, bonds, housing or whatever. We used the 10year Treasury note as an example for the long-term investor. A short-term trader would use the US 90 day T-Bill as a risk benchmark.
What is a “Stop Order”, for purpose of execution just shadow us and let your broker do the rest. Educationally speaking stop orders are used primarily to control losses. Here is a simple example we buy 100 shares of MSFT at the above price of $58.00. So now we are long 100 shares of MSFT at 58. Since we always have an exit strategy, as soon as we get confirmation we enter in an order to “sell 100 shares of MSFT @ 57.75stop” some brokers will ask if this is a stop-loss it’s the same thing. Don’t get confused by the fact a sell stop is placed below the market (current market price) while a buy stop is placed above the market. It’s extremely important your broker knows this is a stop order! If not in this example you end up selling immediately and your broker is proud to give you a fill better than you stop in this case 57.75. A sell-stop at 57.75 does not guarantee you will be filled at 57.75. It does guarantee you will be filled if MSFT trades at or below 57.75 but it does not guarantee price in any case. Stop orders become market orders once the stock starts trading 57.75, therefore, the price may vary like any market order. Our stops are part of an exit strategy, price is secondary if the original plan is failing, for this reason we do not use stop-limit orders.
We enter all our stop orders on a “day only” basis rather than a “GTC” (good until cancelled) basis due to lack of liquidity in the pre and after market trading. I could be wrong but I believe the average retail investor has no choice and must enter stops as “day only” when placing stops. Anyway unless you say GTC it’s a day order.
As we explained to Mike earlier we have to keep the competition guessing on where we are placing stops. The most accurate method is to continue to check our web-site in the members “trades and ideas” section this will give you the exact price of VHF’s execution. But as a rule of thumb if we say set your stop tight, hint, less-than two points. On stocks $2.00 or less there is no stop but the trade will be rated very risky or a “day trade”. Hint trades like this should be a very small part of your holdings assume there is real possibility you will lose your investment, think why is this a $2 dollar stock? On stocks trading between $2 to $15 dollars, set your stops at 30% to 50% of the purchase price. Remember this is disaster protection and stops will seldom be the actual exit price. Hint lower priced stocks will carry the 50% stop. All stocks $15 and higher will have stops set between 5% to 25%, again the lower priced stocks carrying the 25% stop level.
I hope this helps you in defining stops placements. Again the best way is check our web-site to confirm our exact exit point. VHF makes money by limiting our losses and letting our profits run or by stacking. And though on low priced high risk trades we a willing to lose 50%, our profit goal on these types of trades exceed 100% annualized return. You as an investor must realize when we talk of low priced stocks $2.00; high rates of return 100% plus, and possible 50% losses. You should be thinking danger and either have nothing to do with this particular trade or have a very small position. Know the risks before you trade.
The United States Treasury defines VHF’s definition of risk. An investment vehicle that yields greater than the equivalent Treasury security with the same duration has risk. For example if you’re a long-term investor the current 10year US Treasury Note is the risk-free rate. Therefore, any investment that yields a return greater than the 10 year Treasury note has risk. The Current 10 Treasury Note yields 4.5%; therefore, any return greater than 4.5% with a 10-year duration has risk. The greater the return the greater the risk, as risk is measured as a spread over the risk-free rate. This is true for any investment vehicle stocks, bonds, housing or whatever. We used the 10year Treasury note as an example for the long-term investor. A short-term trader would use the US 90 day T-Bill as a risk benchmark.
<< Home